Economists defend cotton subsidies

Bob Goodman and Jim Novak don't mince words about the efforts of an international coalition to limit U.S. cotton subsidies. As far as the two Alabama Extension economists are concerned, they are self-serving.

The effort, which pits an informal alliance of developing nations — Brazil, China, India, South Africa and several others — against the United States, Europe and much of the developed world, will likely be a take-no-prisoners fight to the finish. The bone of contention is the $350 billion the developed world pays out in subsidies to support their farm and agribusiness sectors.

Under-developed nations say these subsidies undermine their ability to compete globally. Brazil has the first case challenging these payments before the World Trade Organization. It is targeting the $1.54 billion in U.S. subsidies paid to cotton and agribusiness, saying this practice breaks trade rules.

Goodman and Novak don't buy the Brazilian argument. Before Brazil and other countries point an accusing finger at the United States, they need to take a good, long look in the mirror, the economists say. American cotton producers and agribusinesses, they say, aren't the only ones who benefit either directly or indirectly from U.S. subsidies.

The effects work both ways. A prime example involves U.S. export subsidies for cotton, Goodman says. True, U.S. cotton producers and cotton merchants benefit tremendously from these subsidies, which are paid whenever U.S. cotton prices fall below the world market average. And, yes, these subsidies tend to depress world prices for cotton, undermining the ability of some foreign producers to compete effectively. The flipside to this argument is that by depressing prices, these subsidies benefit foreign textile manufacturers.

“With export subsidies, we are harming the profitability of foreign countries to some extent by lowering cotton prices,” says Goodman, who is also an Auburn University associate professor of agricultural economics. “But at the same time, we're also increasing the nation's industrial capacity by providing foreign textile mills with cheaper cotton.”

What these manufacturers receive, in effect, is a subsidy, compliments of the U.S. taxpayer. A similar principle holds true for staple commodities such as grain, Goodman says.

“True, grain subsidies depress world prices and crowd out subsistence farming in many of the developing countries,” he says. “But at the same time we're providing the general population with cheaper food — something that is simply not possible in an economy based on subsistence farming.”

Besides, they argue, the foreign producers clamoring to end U.S. farm subsidies are not subsistence farmers. “Brazilian farmers who brought the suit talk about Third World conditions and the starvation of subsistence farmers, but these aren't the subsistence farmers the cotton subsidies are accused of hurting,” says Novak, who is also an Auburn University professor of agricultural economics. “They operate massive farms, not the two to four acre farms that are being hurt by subsidies.”

Brazilian farmers, in particular, also have benefited immensely from one other by-product of American farm subsidies: technology, especially genetically altered crops designed to withstand insects and herbicides. American cotton producers are required to pay technology fees on an acre-by-acre basis to grow these crops. Brazilians don't.

“Their government has essentially told them that they don't have to pay for what they use,” Goodman says. “They say, ‘These Americans have something unique, so you go ahead and use it and don't worry about paying for the technology.’ This amounts to a significant subsidy of about $40 an acre — one they've essentially stolen from us.”

The advantages Brazilian producers derive from transgenic technology is another example of how the U.S. farm system, which is based on subsidies, has benefited the entire world. Money provided by government farm programs allowed these technological changes to occur — changes that likely wouldn't have been possible in another system, Goodman says.

“Monsanto knew they could develop biotech crops and make money from them because they knew there were farmers out there who would buy them,” he says. “To put it another way, farmers were there to buy these crops because the farm bill kept them in the farming business.”